Letter concludes that laws recently enacted in some states that prohibit or restrict branching by out-of-state industrial loan companies into the enacting state undercut those states' laws permitting interstate de novo branching by banks generally. The result is that under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, federal regulators cannot approve the establishment of de novo branches in such states by any out of state bank.

FEDERAL DEPOSIT INSURANCE CORPORATION

OFFICE OF THE COMPTROLLER OF THE CURRENCY

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Interpretive Letter #1068

August 2006

12 USC 36G

July 28, 2006

Mr. John "Buz" Gorman

General Counsel

Conference of State Bank Supervisors

1155 Connecticut Ave NW, 5th Floor

Washington, DC 20036-4306

Re:

State Restrictions On the Establishment of

Interstate De Novo Branching By Industrial Loan Companies.

Dear Mr. Gorman:

You have asked our opinion regarding certain state legislation intended to restrict

interstate de novo branching by industrial loan companies and industrial banks

(collectively, “ILCs”). Specifically, we understand that some states have proposed or

enacted legislation that prohibits an out-of-state ILC, but not other types of banks, from

establishing a de novo branch in their states. These restrictions have particular

significance for those states that generally permit out-of-state banks to establish de novo

branches in their states. With respect to such states, the question has been raised whether

these state ILC restrictions, if enacted, would affect the ability of other out-of-state banks

to establish de novo branches in those states.

Riegle-Neal Act

The establishment of interstate de novo branches was first authorized under Federal law

in 1994 when Congress enacted the Riegle Neal Interstate Banking and Branching

Efficiency Act of 1994 (“Riegle Neal”).1 Riegle Neal was generally intended to enhance

and expand interstate banking and branching. In accordance with that purpose, it added

provisions to both the Federal Deposit Insurance Act (the “FDI Act”) and the National

Bank Act authorizing both state banks and national banks to establish and operate

interstate de novo branches under certain conditions.2

1

Pub. L. No. 103-328, 108 Stat. 2339 (1994).

2

See id. § 103.

anching. In accordance with that purpose, it added

provisions to both the Federal Deposit Insurance Act (the “FDI Act”) and the National

Bank Act authorizing both state banks and national banks to establish and operate

interstate de novo branches under certain conditions.2

1

Pub. L. No. 103-328, 108 Stat. 2339 (1994).

2

See id. § 103.

2

Specifically, Riegle Neal added section 18(d)(4) of the FDI Act, 12 U.S.C. § 1828(d)(4)

(“Section 1828(d)(4)”) regarding state nonmember banks and 12 U.S.C. § 36(g) (“Section

36(g)”) regarding national banks.3 Section 36(g) applies to state member banks by virtue

of section 9 of the Federal Reserve Act.4 These sections generally provide that the

appropriate Federal banking agency (i.e., the FDIC, for state nonmember banks; the

Office of the Comptroller of the Currency, for national banks; and the Federal Reserve

Board, for state member banks) may approve an application to establish and operate a de

novo branch in a state (other than the bank’s home state) in which the bank does not

maintain a branch, if the host state has a law in effect that meets certain criteria.5

These criteria include the requirements that the host state have a law in effect that “(I)

applies equally to all banks, and (II) expressly permits all out-of-state banks to establish

de novo branches in such state.”6 For purposes of this discussion, these criteria are

collectively referred to as the “Host State Law Requirements.” If a host state’s law fails

either of those requirements, the appropriate Federal banking agency would not be able to

approve the establishment of a de novo branch in the host state by any out-of-state bank.7

For purposes of Section 1828(d)(4), the term “bank” includes any national bank and any

state bank.8 Under the FDI Act, a “State bank” is defined to include “any bank, banking

association, trust company, savings bank, industrial bank (or any similar depository

institution which the Board of D

ble to

approve the establishment of a de novo branch in the host state by any out-of-state bank.7

For purposes of Section 1828(d)(4), the term “bank” includes any national bank and any

state bank.8 Under the FDI Act, a “State bank” is defined to include “any bank, banking

association, trust company, savings bank, industrial bank (or any similar depository

institution which the Board of Directors finds to be operating substantially in the same

manner as an industrial bank) or other banking institution which – (A) is engaged in the

business of receiving deposits, other than trust funds . . . and (B) is incorporated under the

laws of any State or which is operating under the Code of Law for the District of

Columbia (except a national bank).”9 Similarly, the term “bank” as used in Section 36(g)

includes “trust companies, savings banks, or other such corporations or institutions

carrying on the banking business under the authority of state law.”10 Consequently, the

term “bank” as used in both Section 36(g) and Section 1828(d)(4) includes ILCs.

State Restrictions on De Novo Branching by ILCs

As noted above, some states have enacted or proposed legislation that prohibits an out-of-

state ILC, but not other types of banks, from establishing a de novo branch in their states.

Viewing these state ILC restrictions in light of the Host State Law Requirements, it is

3

Id. § 103(a), (b).

4

See 12 U.S.C. § 321.

5

Both Section 36(g) and Section 1828(d)(4) include definitions of the terms “de novo branch,”

“home state,” and “host state.” See 12 U.S.C. §§ 36(g)(3)(A), (B) and (C), 1828(d)(4)(C), (D) and (E).

6

12 U.S.C. §§ 36(g)(1)(A), 1828(d)(4)(A)(i).

7

Approval of such an application is also subject to certain additional conditions and provisions

dealing generally with host state filing requirements, community reinvestment, and the adequacy of capital

and management. See 12 U.S.C. §§ 36(g)(1)(B), 1828(d)(4)(B).

8

See 12 U.S.C

S.C. §§ 36(g)(3)(A), (B) and (C), 1828(d)(4)(C), (D) and (E).

6

12 U.S.C. §§ 36(g)(1)(A), 1828(d)(4)(A)(i).

7

Approval of such an application is also subject to certain additional conditions and provisions

dealing generally with host state filing requirements, community reinvestment, and the adequacy of capital

and management. See 12 U.S.C. §§ 36(g)(1)(B), 1828(d)(4)(B).

8

See 12 U.S.C. § 1813(a)(1).

9

12 U.S.C. § 1813(a)(2).

10

12 U.S.C. § 36(l).

3

apparent that, if enacted, these restrictions would cause a host state’s law to fail those

requirements. If a state enacted these restrictions, the state’s de novo branching law

would not apply equally to all banks because the state’s law would exclude one type of

bank, i.e., ILCs. Similarly, the state’s de novo branching law would not expressly permit

all out of-state banks to establish de novo branches in such state because the state’s law

would not permit one category of out-of-state banks (i.e., out-of-state ILCs, generally, or

in some state laws, Utah-chartered ILCs) to establish de novo branches in such state.

Consequently, in our view, a state that enacted this type of de novo branching restriction

on ILCs would cause its interstate de novo branching law to fail the Host State Law

Requirements, and the appropriate Federal banking agency would not be permitted to

approve the establishment of de novo branches in that state by any out of-state bank.

This determination, however, does not affect the validity of any interstate de novo

branches approved under either Section 36(g) or Section 1828(d)(4) or section 9 of the

Federal Reserve Act prior to the enactment of such restrictions

nts, and the appropriate Federal banking agency would not be permitted to

approve the establishment of de novo branches in that state by any out of-state bank.

This determination, however, does not affect the validity of any interstate de novo

branches approved under either Section 36(g) or Section 1828(d)(4) or section 9 of the

Federal Reserve Act prior to the enactment of such restrictions.

Another type of state law permits all out-of-state banks to establish de novo branches in

the host state, but prohibits an out-of-state ILC (but not other types of banks) from

establishing a branch on the premises of a commercial affiliate of the ILC.11 This type of

state law does not apply equally to all banks and therefore fails the Host State Law

Requirements. If, however, the state law expressly permits all out-of-state banks to

establish de novo branches in the state, but also provides that neither banks chartered in

the state nor out-of-state banks may establish or maintain a branch in the state on the

premises of a commercial affiliate,12 the state law would apply equally to all banks and

would appear to comply with the Host State Law Requirements. While this latter type of

law does impose a “locational limitation” on where any bank (whether an out-of-state

bank or an in-state bank) may establish a branch within the state, this limitation does not

treat any class of banks differently than any other banks contrary to the requirements of

the Riegle Neal Act.

We hope this response addresses your concerns.

Sincerely,

/s/

/s/

/s/

____________________

___________________

___________________

Julie L. Williams

Douglas H

anch within the state, this limitation does not

treat any class of banks differently than any other banks contrary to the requirements of

the Riegle Neal Act.

We hope this response addresses your concerns.

Sincerely,

/s/

/s/

/s/

____________________

___________________

___________________

Julie L. Williams

Douglas H. Jones

Scott Alvarez

Chief Counsel/First Senior Acting General Counsel

General Counsel

Deputy Comptroller

FEDERAL DEPOSIT

BOARD OF GOVERNORS OF

COMPTROLLER OF THE

INSURANCE CORPORATION

THE FEDERAL RESERVE

CURRENCY

SYSTEM

11

See, e.g., VA. CODE ANN., § 6.1-232.3 (2006).

12

See, e.g., MD CODE ANN., FIN. INST., § 5-1003(a) and (b) (2006).